Before you know it, this blizzard will have turned to tulips and it will be time to submit your 2004 tax returns. With April 15th fast approaching, The Harbus recently spoke with Lewis Weinstein of Generation Tax to discuss the ins and outs of student tax returns. Not only is Weinstein a third generation accountant, but he is also a veteran of preparing tax returns on behalf of HBS students.
Harbus: How long have you been working with the HBS community?
Lewis Weinstein: I have been filing returns for 19 years and have been working with HBS students and faculty for the past 12 years. In fact, my first HBS client – Mark Hulak – is still a client today. Despite having a transient client base, over 80% of my clients choose to stay with me because I have the historical information on their taxes from previous years, in addition to key information about their work and personal situations, making it very easy for me to carry that information forward and make the process much easier for them.
Harbus: Why is it important for students who have recently made the transition from professional to student to sit down with a tax advisor?
LW: According to the IRS, 52% of all tax payers use a professional tax preparer. The three main reasons why a majority of people use a professional tax preparer include the following:
1. Time – Many people simply don’t have the time to complete their own taxes.
2. Complexity – Many people don’t have the aptitude to research the areas that relate and/or affect their taxes, particularly the more complex their taxes become.
3. Fear – Many people simply want to know there will be someone there to help them if and when they are ever audited.
Harbus: Can you explain in greater detail when and how a student’s education expenses may be tax-deductible?
LW: Section 162 of the Internal Revenue Code states, “There should be allowed a deduction of all ordinary and necessary expenses paid or incurred while carrying on in a profession”, allowing some taxpayers to deduct a large portion of their education expenses, thereby greatly reducing their tax burden.
This however does not apply to all students, but rather to a smaller subset of students who meet the following very well-defined set of criteria:
1. Education must not be a minimum educational requirement for the tax payers’ profession. For example, a doctor can not deduct their pre-med expenses and a lawyer can not deduct law school expenses. In contrast, for most MBAs, their undergraduate degree will likely have satisfied their minimum education requirements for their profession.
2. Education cannot qualify the taxpayer in a new trade of profession. While this requirement is slightly more ambiguous, this condition reflects that the tax payer must maintain that their graduate study in of itself can not qualify them to do anything new than what they were already qualified to do prior to entering graduate school. Put another way, the education must have a direct and substantial relationship to the tasks and activities required in the taxpayer’s profession both before and after business school and must maintain or improve skills they already have. For those who come from non-business backgrounds and did not have strong business skills prior to entering HBS, such as those in the military or from engineering backgrounds, may not meet these criteria. In addition, career switchers (for example, going from finance to marketing) will have a difficult time deducting their MBA expenses.
3. The education must maintain and improve skills needed in the tax payer’s profession.
The case law is clear. The more business like you old career and duties, the more likely you will be considered to be maintaining and improving your skills.
There is one final point. As mentioned earlier, you must be “carrying-on” in your profession. The IRS has a rule of thumb. The IRS says if you take off a year or less from your employment, you are still considered to be carrying on in your profession. Well, where does this put the HBS student who takes off 18 months to obtain his or her MBA. There was in fact an HBS student who was audited many years ago. He had deducted his MBA expenses and the IRS challenged him and said he was not carrying on in his profession. The court however, disagreed, ruling that the student was carrying on his profession because the HBS program was for a definite and temporary length of time, representing a temporary hiatus not a departure from his chosen profession. The student did in fact re-enter the workforce in a similar position from what he had been doing prior to HBS promptly upon graduating.
Each case is clearly individual and if any student feels he or she might match these criteria their next step should be to investigate whether they do meet these criteria, which is something I have helped many HBS students do. If in fact there is a match, the student might be in for a significantly reduced tax burden.
Harbus: What common mistakes do you see with your student clients?
LW: To clarify, I work with all sorts of clientele, in addition to students. Across the board some of the common mistakes I see include the following:
1. Individuals who forget to carry forward their capital losses from the previous year
2. Individuals who have itemized on their federal return in the previous year and then received a refund from the state, often fail to report that state refund on their federal return the following year.
3. Individuals who paid the state for 2003 in 2004 often don’t realize that that payment qualifies as an itemized deduction for their 2004 return.
4. When individuals figure out the gains and losses on their stocks, many don’t realize that they can use the LIFO or FIFO method to determine their cost basis, which can have a clear impact on their tax burden.
5. If somebody has worked at two different jobs in one year, they sometimes can overpay on their FICA taxes. In 2004, the maximum amount of wages subject to FICA was $87,900. If an individual worked at one employer and received $87,900 in compensation and then went to a second employer within the same year and received an additional $50,000 in compensation, the new employer may not realize the individual is already maxed out on their FICA obligations. If this is the case, the individual can take a credit for the additional FICA taxes paid.
Harbus: What is new in the tax code for 2004 that HBS students should be aware of?
LW: Three things:
1. Students who do not qualify to deduct their MBA expenses under Sec. 162 of the IRS Code (see above) may qualify for the Lifetime Learning Credit. The Lifetime Learning Credit is 20% of the first $10,000 in qualified education expenses paid during the year. However, if your single with modified adjusted gross income over $52,000 or married with modified adjusted gross income over $105,000 you are not eligible for this credit.
2. For 2004, you can take a maximum $4,000 Tuition and Fees Deduction. If you are using the Lifetime Learning Credit you are not eligible for the tuition and fees deduction. Furthermore, if your single with modified adjusted gross income over $80,000 or married with modified adjusted gross income over $160,000 you are not eligible for this deduction.
3. Finally, for 2004, you can deduct up to $2,500 in Student Loan Interest paid during the year. However, if your single with modified adjusted gross income over $65,000 or married with modified adjusted gross income over $130,000 you are not eligible to deduct student loan interest.
Editor’s note: For those students who have further questions for Mr. Weinstein he can be reached at 1-800-640-9797 or at firstname.lastname@example.org.